PLAYING WITH FIRE Italy, China, and Europe - GIOVANNA DE MAIO - Brookings ...

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PLAYING WITH FIRE Italy, China, and Europe - GIOVANNA DE MAIO - Brookings ...
THE NEW GEOPOLITICS                                              MAY 2020

                                                  PLAYING WITH FIRE
                                             Italy, China, and Europe
                                                         GIOVANNA DE MAIO

                      Italy, China, and Europe
                                GIOVANNA DE MAIO

The most significant event for Italian foreign policy in 2019 was the signing of a
Memorandum of Understanding (MoU) with China endorsing the Belt and Road
Initiative (BRI), which marked a break in the ranks of G-7, raising important concerns
from Washington that Italy would become an entry point for Chinese influence in
Europe. In reality, Chinese investment in Italy’s key industries, including energy and
telecommunications, has been growing since 2013.

Chinese foreign direct investment in Italy is also significantly lower than in other major
European economies such as Germany and France, which have not endorsed the BRI but
have secured important trade and investment deals with Beijing. Due to Italy’s difficulties
in attracting investment because of high taxation and bureaucracy (among other factors),
Italy’s decision to sign the MoU on the BRI is an attempt to gain advantages over its European
competitors to attract Chinese investment and address longstanding economic stagnation.

On top of these existing issues, the devastating economic impact of the COVID-19 pandemic
(a 9.1% drop in GDP for 2020 is forecast by the International Monetary Fund) risks
pushing Italy further into China’s arms. There are indeed mechanisms on both national
and European levels to protect against foreign investment in strategic sectors, while
different views on China in the Italian political landscape have led to more decisive actions
to restrict the development of a 5G wireless network through Chinese technology. But, as
Italy’s overall political instability and economic weaknesses prevent the development of a
clear strategy vis-à-vis China, temporary economic gains can easily backfire.

With the United States and China on the brink of a trade war, a trans-Atlantic trade truce
barely holding, and Chinese fifth-generation (5G) wireless technology spreading all over
Europe, Italy’s signing of a Memorandum of Understanding (MoU) with China on the Belt
and Road Initiative (BRI) in March 20191 was both controversial and eye-opening.

                                                                                          Foreign Policy at Brookings | 1

                          The lack of transparency and communication surrounding this move created distrust
                          between Italy and the United States, which had already been disoriented by the
                          scattershot foreign policy and internal quarrels of the coalition government in Rome at
                          the time — a partnership of the anti-establishment Five Star Movement and the right-
                          wing League which lasted 16 months from May 2018 to August 2019. That government
                          vocally advocated for closer relations with Moscow and Beijing — but Italy has a longer
                          history of courting those capitals while remaining anchored in the West.

                          Nor is Italy alone in seeking close economic ties with China. While Italy has the largest
                          market after China for Huawei smartphones2 and Huawei is supplying 5G hardware to

                          communication services providers in major Italian cities, German carmakers sell more
                          to China than anywhere else,3 and France has secured important energy deals with
                          Beijing. Yet the fact is that Italy is the only G-7 country to have endorsed the BRI.

                          In line with the traditional foreign policy   In this context, Italy offers an important
                                                                        case study, illustrating the political
                          attitude of a middle power trying to resist   and economic rationale for European
                          pressure from and get the most out of         countries to cooperate more closely
                          bilateral engagement with larger powers,      with China. This paper explores Italy-
                          the new post-World War II Italian republic    China relations by providing a historical
                          tried to balance solid Atlanticism with a     perspective, a comparison of Chinese
                                                                        foreign direct investment (FDI) in Italy
                          certain openness to partners outside of       and Europe’s other advanced economies,
                          the Euro-American camp.                       and a consideration of increasing Italy-
                                                                        China cooperation in strategic sectors
                          (particularly communication infrastructure) and the mechanisms that are in place (at
                          both European Union and national level) to protect strategic assets for national security.

                          After having discussed the China question in Italy’s political debate, this analysis
                          assesses that: 1) Italy’s longstanding economic stagnation — and the economic
                          shock of the COVID-19 pandemic — combined with its traditional political instability
                          and particularly aggravated by the rise of populist and nationalist forces, places the
                          country at risk of being overwhelmed by Chinese economic and technological power;
                          2) while Italy’s endorsement of the BRI has harmed Italy’s international credibility, the
                          competitive dynamic between EU member states over their trade relationships with
                          China prevents a shared approach to the Chinese power.

                          In 2020, Italy and the People’s Republic of China (PRC) celebrate the 50th anniversary of their
                          diplomatic relations. As with the Soviet Union, the Italian Communist Party (PCI, the largest
                          communist party in Western Europe during the Cold War) played a major role in connecting
                          Rome and Beijing through the creation of the Center for the Development of Economic and
                          Cultural Relations with China and the arrangement of cultural exchange visits to China.4

                          In line with the traditional foreign policy attitude of a middle power trying to resist pressure
                          from and get the most out of bilateral engagement with larger powers, the new post-
                          World War II Italian republic tried to balance solid Atlanticism with a certain openness to
                          partners outside of the Euro-American camp. President Giovanni Gronchi, for example,
                          was the first Western leader to visit the Soviet Union, in 1960, and supported the
                          development of Italy’s business ties with Moscow and later Beijing. While U.S. economic

2 | Foreign Policy at Brookings

aid played a vital role in Italy’s postwar recovery, China’s economic potential attracted
Italy as well. Then as now, Rome encountered significant resistance from Washington,
mostly ascribed to a fear of the Italian Communist Party’s influence over Italy’s foreign
policy. In 1955, for example, a business trip to China by representatives from Fiat and
two other companies from the defense (Viscosa) and chemical (Montecatini) sectors
was canceled after intense lobbying by the U.S. ambassador to Italy. Similarly, two years
later, the White House opposed Italy’s trade deal with China on ball bearings, glycerin,
and phenol, considered to be dual-use materials.5

With the support of Gronchi and Prime Minister Amintore Fanfani, both very ambitious
regarding Italy’s international role, the Italian state-backed energy company ENI, headed
by Enrico Mattei, played a leading role in building up Italy’s presence in China beginning
in 1958. By 1963, SNAM, an ENI holding, signed the first contract with the PRC for a
new hydrocarbon plant in China.6 The Italian government officially recognized the PRC in
1970, a full eight years before the United States. After that, Italian diplomacy walked a
fine line between attempting to profit from the worsening of Sino-Soviet relations to make
the most out of relations with both sides and trying not to endanger its partnership with
the United States. Although smaller in scope in comparison to other Western countries,
trade exchange between Italy and China grew by 96% between 1973 and 1976.7 Yet it
was only in the 1980s that Italy-China trade relations entered a golden age, when the
Italian government, under the initiative of Foreign Minister Gianni De Michelis, allocated
600 billion liras to development projects in China.8 Italy was also the first country
in the Western bloc that then Chinese Premier Li Peng visited after the Tiananmen
square massacre.9 In 2004, under Silvio Berlusconi’s premiership, relations between
Italy and China were formally upgraded to a “strategic partnership”10 that covered not
just bilateral political and economic ties but also cooperation on global issues such as
multilateralism and EU-China relations.

As in the case of Russia in the 1990s, most parties across the political spectrum saw
China in a relatively favorable light, as “an opportunity” (Prime Minister Romano Prodi,
2006),11 “soon to be first global power” (Berlusconi, 2010),12 “a very important strategic
partner” (Prime Minister Mario Monti, 2012).13 More recently, under the leadership of
prime ministers Matteo Renzi (2014-2016) and Paolo Gentiloni (2016-2018), Italy
expressed interest in the BRI, launched by Beijing in 2013. Starting in 2017 and especially
in 2019, several Italian leaders increased the frequency of their official visits to China
and their engagement with their Chinese counterparts. Renzi saw the BRI as a “chance
for [the economic development] of Italian ports,”14 while Gentiloni (the current European
commissioner for economy, and on leave from his post as a distinguished nonresident
fellow at the Brookings Institution) was the only G-7 leader attending the Belt and Road
Forum for International Cooperation Forum in Beijing in May 2017, where he praised
Chinese President Xi Jinping’s decision to include the ports of Trieste and Genoa in the
project.15 More recently, after Xi’s visit to Italy in March 2019 (when China and Italy signed
the MoU on the BRI), other Chinese leaders visited Italy, such as Foreign Minister Wang
Yi, Trade Minister Zhong Shan, Health Minister Ma Xiaowei, and He Lifeng, the minister in
charge of the National Development and Reform Commission.16 In addition to traditional
entities supporting Italy-China relations such as the Italy-China governmental committee,
the economic commission, the bilateral cultural forum, and the bilateral business forum,
in recent months Italy and China have created new frameworks like a financial dialogue
and a mechanism for political consultation between the two foreign ministries, with the
stated goal of deepening economic and political connections and coordinating initiatives
for the 2020 celebrations of the anniversary of diplomatic relations.

                                                                                          Foreign Policy at Brookings | 3

                          Over the years, in parallel with political and economic ties, Italy and China saw a rise
                          of the number of Chinese citizens that established their homes in Italian territory and
                          vice-versa. As of October 2019, Italy hosts 318,000 Chinese citizens on its territory,17
                          making this the third-largest Chinese community in Europe (after those in the United
                          Kingdom and France).18 They work mostly in businesses that produce or sell clothing, in
                          supermarkets, and in electronics stores.19 According to the last census in 2017, there
                          are more than 9,000 Italians in China (an increase of 3,000 compared to 2012).20

                          If Italy’s geographic positioning at the center of the Mediterranean makes it naturally

                          inclined to engage in trade relationships with countries outside of the EU, long economic
                          stagnation, the global financial and euro crises, the migration crisis, and most recently,
                          the devastating impact of the COVID-19 pandemic, have made it almost a necessity. Italy’s
                                                                          industrial base mainly consists of small
                                                                          and medium enterprises that excel in
                          If Italy’s geographic positioning at the terms of the creativity, design, and quality
                          center of the Mediterranean makes it of their products, but lack the resources
                          naturally inclined to engage in trade           to significantly invest in research and
                          relationships with countries outside            development to cope with the challenges
                          of the EU, long economic stagnation, of             globalization. Since the 1990s, Italy
                                                                          has suffered from an asymmetrical
                          the global financial and euro crises,           competition with China, whose export-
                          the migration crisis, and most                  oriented manufacturing and low labor costs
                          recently, the devastating impact of             particularly harmed Italy’s industries, which
                          the COVID-19 pandemic, have made it still focus on traditional sectors.

                          almost a necessity.                             In the 2008 financial crisis, Italy, along
                                                                          with other southern European countries,
                          pursued structural adjustments to reduce public spending, exacerbating its economic
                          problems. Youth unemployment peaked at 43% in 201422 (and is now at 33%),23
                          while the gap between northern and southern Italy grew deeper. The economy faces a
                          longstanding stagnation — since the early 2000s, Italy’s GDP growth has struggled to
                          reach beyond 1.5%; it shrank by 5.3% in 200924 and grew by only 0.2% in 2019.25 Brexit
                          and the hostile trade policies of the Trump administration towards China and the EU also
                          contributed to deterring Italian investment and accelerating the search for alternative
                          investors; all the more as EU sanctions against Russia and Russian countersanctions
                          have deeply damaged the Italian agricultural sector and the exports from small and
                          medium enterprises in Italy’s northern and central regions.26 Trade between Italy and
                          Iran also significantly shrank after the U.S. pulled out of the 2015 Joint Comprehensive
                          Plan of Action (JCPOA) nuclear deal and targeted Tehran with new sanctions.27

                          Under these circumstances — and given China’s pivot to Europe in 2012, targeting the EU
                          wealthiest economies28 — Chinese acquisitions and investments, particularly since 2013,
                          appeared not just as a “mandatory opportunity” for Italian goods to access the gigantic
                          Chinese domestic market, but also as the only alternative to failure. This was the case
                          for the fashion brand Krizia, bought by the Chinese stylist Zhu Chongyun; the motorcycle
                          producer Benelli, acquired by the Qianjiang Group; and the luxury yacht company Ferretti,
                          which was acquired by the Chinese company Weichai after financial troubles caused by its
                          management and the lack of interest from other Italian companies due to the uncertainties
                          and risk adverse attitude that permeated Italy’s business after 2008.29

4 | Foreign Policy at Brookings

 Chinese presence, and with it leverage, in important Italian companies, expanded
 in a variety of sectors. In May 2014, two Chinese companies, the Shanghai Electric
 Group and the China’s State Grid, acquired large stakes in two Italian electric energy
 companies, Ansaldo Energia (40%) and CDP Reti (35%).30 Chinese business interests
 also bought some more publicly visible assets: the soccer clubs Inter Milan31 and AC
 Milan,32 and the construction of luxury apartments in Milan by the China Construction
 Group. During the EXPO food and nutrition trade fair held in Milan in 2015, China was
 the only country that was present with three pavilions: one for itself, one for the city of
 Shanghai, and a third sponsored by China’s largest real estate group, Vanke. It was also
 the first time that China participated in a world expo outside of Asia, making it clear that
 Chinese interest in Italy, and in Europe, was only going to grow.33

 Italian companies appear to appreciate the Chinese way of conducting business, as
 they have been able to keep the project designing/engineering in Italy, while using
 Chinese resources to support research and development, gain access to new markets,
 and ultimately increase their competitiveness on the global market. In this regard, the
 2015 ChemChina acquisition of majority quotas of the storied Italian company Pirelli
 — world leader in the production of tires — provides a good example of Chinese-Italian
 industrial synergies. In return for the know-how Pirelli had developed in its 140-year
 history, the company got access to the growing Chinese market for agricultural tires
 and the opportunity to export tires from China to the United States. At the same time,
 ChemChina and Pirelli formally agreed that the Pirelli research and innovation center
 would keep operating at the University of Bicocca in Milan, allowing Pirelli to hire Italian
 researchers and to preserve the quality of the product design.34

 The increased volume of Chinese’s presence in Italy can be better understood if put
 in perspective with the broader context of Chinese investments in Europe, where
 economies like Germany, France, or the United Kingdom have received more Chinese
 FDI over the past decade compared to Italy according to OECD data. (see Figure 1).35


USD (Billions)

                       2013       2014             2015               2016        2017        2018
                               France           Germany             Italy    United Kingdom

 Source: Organisation for Economic Co-operation and Development36

                                                                                                Foreign Policy at Brookings | 5

                          In Germany, Chinese FDI accounts for more than $80 billion and have been grown

                          constantly since 2013, while in France it has been fairly stable in recent years,
                          fluctuating around $25 billion since 2013. Chinese FDI in Italy, meanwhile, accounts for
                          $12 billion and only began slowly increasing in 2016. However, according to the most
                                                                        recent statistics provided by Merics,37
                                                                        in 2018, overall Chinese FDI in the EU
                          Italian companies appear to                   significantly shrank as a result of the
                          appreciate the Chinese way of                 tightening liquidity in China and increased
                          conducting business, as they have             investment screening in the EU.
                          been able to keep the project                                                    As for EU exports to China, Germany again
                          designing/engineering in Italy, while                                            is the frontrunner among the EU countries.
                          using Chinese resources to support                                               Italy’s exports are approximately on the
                                                                                                           same level as the United Kingdom, just
                          research and development, gain
                                                                                                           behind France, whose exports to China in
                          access to new markets, and ultimately                                            2018 accounted for over $30 billion (see
                          increase their competitiveness on the                                            Figure 2).
                          global market.


                          USD (Billions)















                                                                       France              Germany               Italy             United Kingdom

                          Source: UN Comtrade Database38

                          With the exception of Italy, the countries here illustrated have not endorsed the BRI; yet this
                          has not prevented growing trade with China and Chinese FDI in their economies. So far,
                          13 European countries have signed similar MoUs on the Belt and Road Initiative (Bulgaria,
                          Croatia, the Czech Republic, Estonia, Hungary, Greece, Latvia, Lithuania, Malta, Poland,
                          Portugal, Slovakia, and Slovenia), often accompanied by specific investment deals in a variety
                          of sectors (e.g. infrastructure, energy, or communication). At the same time, France recently
                          secured lucrative Chinese contracts for $15 billion in sectors ranging from aeronautics, to
                          food exports, to even more strategic domains such a nuclear fuel plant to be built by the
                          French group Orano (former Areva).39 In June 2019, the United Kingdom also clinched deals
                          with China worth $620 billion during the Chinese vice-prime minister’s visit to London.40

6 | Foreign Policy at Brookings

From the political perspective, EU member states have shown some coordination in
both criticizing China for human rights violations in Xinjiang province,41 restrictions on its
domestic market, and unfair trade practices,42 and in seeking to engage cooperatively
with Beijing on climate change, upholding the 2015 nuclear deal with Iran, and North
Korean denuclearization. However, from an economic point of view, EU member states
find themselves in a competitive dynamic of business opportunities and technological
challenges where they prefer to act independently. For example, German Chancellor
Angela Merkel and French President Emmanuel Macron disappointed hopes for a joint
visit to Beijing, opting for independent trips accompanied by influential businessmen
of their respective countries (though Macron also took along Phil Hogan, the European
commissioner for trade, and Anja Karliczek, Germany’s education minister), while
avoiding discussing conflictual issues such as technology transfers and cybersecurity.43

As the above graphs show, an endorsement of the BRI is not an indicator of the extent
of a given country’s current or future trade relations with China in strategic sectors.
Yet, while Italy is substantially less exposed to Chinese FDI and exports less to China

than other major European economies do, the MoU that Rome signed with Beijing last
March attracted more attention and criticism in Washington than other trade deals or
MoUs between China and other EU countries. Questioned by the House Foreign Affairs
Committee about the Italian decision,
Secretary of State Mike Pompeo said The real source of American frustration
that “It’s disappointing any time any is the legitimacy that Italy provided the
country begins to engage in behavior
and commercial interactions with China BRI as the first and only G-7 country
that aren’t straight up” and expressed to sign on to what is widely seen as a
sadness because, in his opinion, “the geopolitical project.
people of those countries ultimately

Indeed, the MoU referenced cooperation in transportation, logistics and infrastructures
(including telecommunications), but Italian authorities firmly insisted on its non-binding
nature and on the fact that it was drafted in full accordance with European standards,
and ultimately on the limited economic scope of the trade deals that accompanied it
($2.8 billion).45 But while U.S. criticism is focused on concerns over potential security
risks connected with Chinese control of key infrastructure and data security issues
related to the development of 5G networks, the real source of American frustration is
the legitimacy that Italy provided the BRI as the first and only G-7 country to sign on to
what is widely seen as a geopolitical project.

In this regard, characteristics of the Five Star-League government — the political clumsiness
of unexperienced leaders, ambiguities in foreign policy resulting in sovereigntist choices,
and rivalries and lack of cooperation between coalition partners — were particularly
relevant in shaping the decision of signing the MoU on the BRI. While both coalition
partners shared Euroskeptic views, they had different ideas on how to promote Italy’s
national interest, with the Five Star Movement more vocally quarreling with the EU on
budgetary issues and more firmly convinced that deepening ties with Beijing would
benefit the Italian economy. Yet, while engaging with partners outside the Euro-Atlantic
area for economic interests fits into the traditional approach of Italian foreign policy, the
signing of the BRI was a strongly political move. In addition to it, the League and the Five

                                                                                          Foreign Policy at Brookings | 7

                          Star Movement’s many differences on domestic and foreign policy and their divergent
                          fortunes in the polls (the League significantly more and the Five Star Movement
                          significantly less popular than at the March 2018 election) heated up domestic political
                          debate ahead of the May 2019 European Parliament elections, giving the impression of a
                          government constantly on the brink of crisis. As a result, the government did not provide
                          a sufficient oversight of the China Task Force and underestimated the consequences
                          and reputational impact of signing a MoU on the BRI.46

                          Apart from breaking the ranks of the G-7 countries, Italy also undermined its credibility
                          vis-à-vis European allies at a moment in which the European Union was starting to
                          promote its Connectivity Strategy, envisaging a shared approach to enhance ties between
                          Europe and Asia,47 and was about to launch the EU-China strategic outlook, establishing
                          a framework for cooperation with China. As a result, Italy raised apprehensions over it
                          becoming an entry point for Chinese influence in the West.48

                          But this was precisely the political rationale of Italian negotiators: they hoped to leverage
                          Italy’s political weight in endorsing the BRI in order to acquire more diplomatic leeway
                          with Beijing for potential business deals and to gain a competitive advantage over other
                          European countries exporting to China. In line with its traditionally open and ideology-
                          free approach to China and to international relations in general, Italy concluded this
                          deal under the banner of its own national interest. Small and medium enterprises (the
                          core of the Italian economy) in particular welcomed the MoU as it defines standards
                          for trading with China.49 As the MoU also established a framework for cooperation
                          between Rome and Beijing in third countries, Italy’s economic and security interests
                          in the stability of North African countries (where Chinese influence and FDI have been
                          growing in recent years) are particularly well served.

                          Notwithstanding the creativeness and high quality of Italian industry, the country’s
                          attractiveness for FDI is much lower in comparison to other European countries as
                          assessed by the World Bank (for high taxation, intricate bureaucracy, and low level of
                          productivity among other factors),50 and it is fair to assume that the Chinese might
                          have insisted on Rome endorsing the BRI as a condition for investments in larger-scale
                          projects to improve infrastructure and connectivity. Following the signing of the MoU,
                          Italy has already been granted a degree of political favoritism by China, as Luigi Di Maio
                          was the only foreign minister amidst the heads of state and government attending the
                          China International Import Expo in Shanghai in November 2019; he said there that
                          2020 will be the year in which Italy will “harvest the fruits of the MoU” and announced
                          important deals for the export of Italian beef and special varieties of rice.51

                          Whether or not endorsing the BRI will help Italy beat its European competitors for future
                          access to Chinese markets or attract more Chinese investments, is a question that it is
                          too early to assess — overall it was meant to establish a framework for cooperation more
                          than immediate benefits.52 So far, there has been no significant progress in infrastructure
                          projects discussed alongside the MoU, specifically regarding the industrial giant Chinese
                          Communication and Construction Company’s (CCCC) interest in the port of Trieste. That
                          city’s geographic location at the north end of the Adriatic Sea and the special free trade
                          zone status of its port could make it the main entry-point for Chinese exports to central
                          and eastern Europe, and a potential competitor for the German ports of Hamburg53
                          and Duisburg.54 But apart from these projects involving traditional infrastructure, urgent
                          questions have been raised around the national security implications of increased
                          cooperation with China on 5G telecommunications technology.

8 | Foreign Policy at Brookings

Since 2004, Huawei has steadily expanded its presence in Italy through projects on
“smart cities”55 with university research centers.56 Today, Italy is the second largest
market for Huawei smartphones and the Chinese tech giant employs around 800
people in Italy, a significant figure given that Huawei does not have production plants in
the country.57 Huawei’s employment numbers are even higher in Germany and France,
respectively 2,20058 and 1,000,59 with the company’s first factory outside of Asia
expected to be opened in France.60 Furthermore, Huawei recently recruited 85 Italian
developers to work on its own app distribution platform AppGallery61 to supply Huawei
smartphones instead of outsourcing it to Google’s Play Store.

During the Italy-China Forum in Milan in July 2019, Huawei Italia CEO Thomas Miao
revealed the company’s plans to invest more than $3.1 billion in Italy over the next
three years in supplies, marketing operations, and research and development, with the
intention of creating around 1,000 jobs, as well as a collaboration with the University
of Pavia, the Microelectronics Innovation Lab.62 With a strategy based on beating
competitors through an unrivaled level of technological advancement combined with
low prices, Huawei was able to partner with major Italy communication companies for
pilot projects for the launching of a 5G network that would allow Italian providers to
raise the prices for their services (which have been significantly decreasing over the last
years). Huawei technology may be soon employed in the metropolitan areas where it has
been already tested, including Milan, Bari, Matera, L’Aquila, Prato, and Rome, where it
closely cooperates with TIM and Fastweb.63

Due to 5G’s incredibly innovative potential consisting in delivering low latency, high data
rates, and reliable connections, Italy, like other countries, counts on the technology to
play a crucial role in economic development first for urban areas and then for sectors
demanding dedicated coverage (manufacturing, energy, and healthcare among others).
Out of 50 5G commercial contracts Huawei has secured globally, 28 were signed in
Europe.64 As Huawei appears to be the most competitive company in the global race to
5G, with little direct European competition currently from Nokia and Ericsson,65 both of
whom are struggling to meeting demand,66 European countries are generally finding it
difficult to halt cooperation with China on 5G technology because of the vital importance
they ascribe to this technology for their future economic development.

Yet the deeper the interconnections between industries and critical services become,
the higher is the risk of cyberthreats related both to Chinese government control over
Huawei and to the nature of the 5G technology itself. The European Commission67 and
the European Union Agency for Cyber Security (ENISA)68 identify threats and risks of 5G
technology as including espionage by state or state-backed actors, and state interference
through 5G supply chains, among others. In its annual report, the Huawei Cyber Security
Evaluation Centre (HCSEC) Oversight Board in the United Kingdom69 warned about
significant technical issues in Huawei’s engineering processes — specifically in software
development — and declared that until these issues are solved, it would be difficult
to provide substantial assurances regarding the management of long-term risks for
U.K. national security. Similarly, the Italian Parliamentary Committee for the Security of
the Republic conducted a study70 in which it urged the Italian government to consider
the exclusion of state-controlled companies such as Huawei from the building of 5G
networks and has recently requested an investigation regarding the data of the Italian
users of the Chinese video-sharing app TikTok.71

                                                                                       Foreign Policy at Brookings | 9

                           In July 2016, the European Union adopted a directive on the security of network
                           and information systems72 listing specific security requirements relevant to the 5G
                           ecosystem and related critical systems in EU telecoms legislation. Specifically, member
                           states need to ensure that telecoms operators take appropriate measures to manage
                           security risks, preserve the integrity of their networks, and cooperate with each other
                           on cross-border risks and incidents. Some officials advocate that the risk related to
                           Huawei technology in the European market could potentially be “managed” overall by
                           limiting outsourcing to Huawei of limited parts of the network that are not connected
                           to the traffic of data, or, alternatively, by limiting the information circulated through the

                           Huawei 5G network (for example no military or other classified intelligence).73

                           Nevertheless, the complex nature of this cutting-edge technology makes it difficult
                           to provide any real security guarantees, because of the risk of hidden “backdoor”
                           data access for Huawei.74 If so, any sort of data transmission through a Huawei-built
                                                                         network could potentially be at the
                          In recent months, Italy has aligned            disposal of the Chinese government,
                          itself with the more protectionist             especially in light of the 2017 Chinese
                                                                         National Intelligence Law, which obliges
                          approach of France, Germany, and
                                                                         companies to accept government
                          Poland, pushing the European                   supervision and ultimately to cooperate
                          Commission to take more decisive               with the government in matters of
                          steps on competition laws in order to          national security.75 For this reason, the
                          protect the EU’s strategic sectors and Italian government has76 put in place a
                                                                         new cybersecurity law and expanded
                          infrastructure against competition             the “golden power rule” to require further
                          coming from         the United States          screening of FDI in strategic sectors such
                          and China.                                     as communications.

                           The challenges posed by Chinese-developed 5G technology must be understood in
                           the context of the broader discussion on the screening of FDI coming into the EU from
                           third countries.

                           In a March 2019 document, “EU-China — a strategic outlook”,77 the European Commission
                           refers to China simultaneously as a “partner” in some policy areas and “a systemic rival
                           promoting alternative models of governance.” The report insists on the need for Beijing to
                           take on more responsibility and reciprocity in its relations with the EU, a point reiterated by
                           Macron when he met Xi in Paris together with Merkel and then-President of the European
                           Commission Jean-Claude Juncker in March 2019 in an attempt to present a European
                           front to address the China challenge.78 Since strategic interests vary by country, the EU
                           for now only sets guidelines for member states to engage with third countries and state-
                           owned entities, establishing a broad framework for the screening of FDI into the Union,
                           and instructing countries to evaluate criteria such as the potential effects on critical
                           infrastructure and sensitive facilities.79 As of now, 15 European countries have notified
                           the European Commission of their screening mechanisms and amendments,80 most of
                           which consist of regulations allowing the government the use of special powers in order
                           to screen FDI that is considered potentially harmful to the national interest.

                           As far as Italy is concerned, legislation on FDI screening is robust and has been
                           evolving over the years to achieve its current formulation, which refers to these

10 | Foreign Policy at Brookings

special powers as the “golden power rule.” When it was first introduced in 2012,
Italy’s screening of foreign investments was mostly related to asset acquisitions in the
energy, transportation, security, and communications sectors. But in 2016, law decree
148 substantially extended the applicability of the “golden power rule” to the “high-
intensity technological sector,”81 in light of growing concern over Chinese acquisitions
and investments in Italy.

Despite the broadened scope of the investment screening law, however, the decision
to apply the “golden power rule” is ultimately a matter for political discretion. Italy does
not have an independent committee to take screening decisions like the Committee on
Foreign Investment in the United States (CFIUS).

In recent months, Italy has aligned itself with the more protectionist approach of
France, Germany, and Poland, pushing the European Commission to take more

decisive steps on competition laws in order to protect the EU’s strategic sectors and
infrastructure against competition coming from both the United States and China.82
The business community agrees with this approach: a recent position paper from
the General Confederation of Italian
Industry (Confindustria) advocates for Despite the broadened scope of the
more protectionist measures and the investment screening law, however, the
extension of European standards in decision to apply the “golden power
trade relationships with third countries
and urging the Italian government to rule” is ultimately a matter for political
cooperatively engage in the definition of discretion.
a common European strategy towards

Over Italy’s postwar history, parties in power from all political families have sought
economic opportunities and political cooperation with China. As mentioned, recent
prime ministers also saw potential fruitful opportunities for Italy in the BRI.84

However, under the recent Five Star-League government, Italy-China relations became
an issue of disagreement between the coalition partners, at least in their foreign
policy narrative. The Five Star Movement had been one of the main proponents of
an intensification of Italy’s ties with China since it entered the Italian parliament in
2013 as an anti-establishment opposition force. Five Star’s advocacy for an alternative
approach to foreign policy, particularly vis-à-vis countries like China and Russia, was
tinged by strong Euroskepticism and mild anti-Americanism. For example, in 2015, the
Five Star members of the Italian parliament’s foreign affairs committee organized a
conference titled “the new world with the BRICS,”85 aimed at providing Italy with a “new
geostrategic approach that would be an alternative to the Euro and to Atlanticism.” 86 In
2016, Five Star MPs submitted a legislative proposal that would have subjected Italy’s
membership in NATO to a biennial ratification by the Italian parliament.

The anti-Atlanticist attitude has gradually faded and now completely disappeared as
the Five Star Movement gained more political experience, entered government, and
changed coalition partners in August 2019. In line with its “ideology-free” approach
to politics and ideas on prioritizing national interests over international cooperation,
the party established a Task Force on China under the leadership of the Ministry of

                                                                                        Foreign Policy at Brookings | 11

                           Economic Development, headed at the time by the Five Star Movement’s then-leader
                           Luigi Di Maio.

                           Although aligned with Five Star on anti-European stances, such as blaming the EU
                           for Italy’s economic stagnation, the League’s leader Matteo Salvini never criticized
                           the United States and admired President Donald Trump’s “America First” approach.
                           At the same time and behind the scenes, the League kept on engaging with the two
                           main challengers to U.S. leadership, China and Russia. In fact, while negotiating for
                           government posts in the 2018 coalition formation, the League was able to place one
                           of its key players, Michele Geraci, as undersecretary of state with responsibility for
                           trade at Di Maio’s Ministry of Economic Development, where he became the head of
                           the Task Force on China. With a background in electronic engineering and business
                           administration, Geraci has long been tied to China, with teaching experience in three
                           Chinese universities, and he was the mastermind behind Italy’s signing of the MoU on
                           the BRI.

                           The frequent clashes between the coalition partners, along with the unstable climate
                           of the electoral campaign for the 2019 European Parliament elections, gave Geraci a
                           great deal of latitude for his work on the MoU, with little oversight from both Salvini and
                           Di Maio, who underestimated the political weight of such initiative. As heavy critiques
                           arrived from the White House87 immediately after the signing of the MoU, Di Maio
                           visited the United States and met with then-National Security Advisor John Bolton and
                           then-Secretary of Energy Rick Perry in an attempt to reassure Washington about Italy’s
                           loyalty and trans-Atlantic commitments.88

                           The Five Star Movement’s openness to China stayed consistent even after the collapse
                           of the coalition with the League and the start of a new coalition with the center-left
                           Democratic Party (PD), in which Di Maio became foreign minister. In this capacity,
                           Di Maio pushed to transfer competencies for the international promotion of Italian
                           business interests and brands to the Ministry of Foreign Affairs.89 This means that
                           the Italian Trade Agency (ICE), responsible for international trade, has been moved
                           from the Ministry of Economic Development to the Ministry of Foreign Affairs, giving Di
                           Maio a broad control over Italy-China relations in the framework of the BRI. This reform
                           had been on the table for quite some time, but the fact that it was finalized under the
                           leadership of Di Maio is a sign of the Five Star Movement wanting to have more control
                           over Italy’s economic agenda and ensure continuity in Italy’s opening to China. This is
                           reinforced by the fact that Di Maio chose Ettore Sequi, former Italian Ambassador to
                           Beijing, as cabinet chief for the Ministry of Foreign Affairs.90

                           The Five Star Movement’s fascination with China is also linked to its focus on technology.
                           Davide Casaleggio — the son of the late internet guru Gianroberto Casaleggio, co-
                           founder of the Five Star Movement and promoter of direct democracy — recently hosted
                           Huawei Italia CEO Thomas Miao for an event on smart business organized in Milan by
                           his company, the Casaleggio Associates, which manages the party’s online platform
                           Rousseau91 as well as the blog of its other co-founder and former leader, the comedian
                           Beppe Grillo. Di Maio symbolically “switched on” the first 5G antenna connecting Bari
                           with Matera (inaugurating the second testing-round of this project),92 while Manlio Di
                           Stefano (currently undersecretary of state in the Ministry of Foreign Affairs) attended
                           the inauguration of Huawei’s Rome office in October.93

                           From behind the scenes, Grillo cultivated informal ties with the Chinese ambassador
                           in Rome, who invited him for a private visit at the embassy.94 Grillo has published

12 | Foreign Policy at Brookings

controversial posts (written by others) on his blog95 denying the human rights abuses
in Xinjiang against the Uighur population. Similarly, Di Maio had initially adopted a very
cautious approach on the massive protests in Hong Kong at the China International
Import Expo in Shanghai in early November 2019.96 Yet, after the Chinese ambassador
in Rome openly condemned the video conference between the Hong Kong protest
leader Joshua Wong and Italian Members of Parliament, Di Maio finally said that
“commercial ties [between Italy and China] cannot put into question the respect of the
Italian institutions, of the parliament and of the government.”97

Conversely, Salvini’s League was the party that most vocally opposed close cooperation
with China, supported by Berlusconi’s Forza Italia98 and Giorgia Meloni’s Brothers of
Italy. Though Geraci, who negotiated the MoU, belongs to the League, just a couple

of weeks before Italy signed it, Giancarlo Giorgetti — the undersecretary for the prime
minister and one of the League’s most influential personalities — traveled to the United
States to reassure Washington about the content of the MoU and the legislative tools
that the League was promoting in
order to prevent intrusive foreign (read China’s growing investments in Italy’s
Chinese) investments. Later in June, strategic sectors and infrastructure
Salvini met with Secretary of State
Mike Pompeo and Vice President Mike
                                            might still become an object of
Pence, reiterated Italy’s closeness to economic blackmail, particularly for
the United States,99 and stressed the Italian local administrations that are
importance of national sovereignty more likely to accommodate Chinese
over trade deals with China.100 On
                                            conditions to boost the local economy
a less rhetorical level, the League
actually pushed for the extension of the while not being protected by a stable
above-mentioned “golden power rule” central government with a consistent
(screening foreign investment to protect strategy on how to engage with China.
national strategic assets) to electronic
communication services running on broadband with 5G technology, mostly targeting
Huawei and ZTE.101 This proposition became a law in May 2019, and the new coalition
government between the Five Star Movement and the left-of-center Democratic Party
applied it to supply deals involving communications companies (TIM, Vodafone, Wind
Tre, Fastweb, and Linkem) operating in Italy which had recently partnered with Huawei
and ZTE on the development of 5G.102 In a very propagandistic fashion, once back in
opposition, Salvini also insisted on scheduling a vote to condemn the violence in Hong
Kong and took stronger anti-Chinese stances.

In the meantime, the Five Star Movement’s current coalition partner, the Democratic
Party — which has always had trans-Atlanticist views on foreign policy — has been
essentially silent on the China issue with the exception of deputies like Lia Quartapelle103
and Ivan Scalfarotto,104 who have relatively limited influence on the leadership of
the party. This silence is probably motivated by the fear of (further) destabilizing a
precarious government coalition, and out of an acknowledgement of the importance
of Chinese investments for revitalizing the Italian economy.

While all political forces seem to agree on this last point, the absence of a long-term
and forward-looking China strategy does expose Italy to severe risks of economic
blackmail. As the political clumsiness around the signing of the MoU has shown,
China did not miss the opportunity to exploit the rivalries between Italy’s political
forces and capitalize on the political endorsement of the BRI from a G-7 country. For

                                                                                        Foreign Policy at Brookings | 13

                           now, experts from the Bank of Italy exclude the risk of Italy falling into a “debt-trap”105
                           as a result of predatory Chinese lending practices as seen in smaller countries with
                           weaker political systems.106 For now, no significant advancement has been reported
                           on Chinese operations regarding the ports of Genoa and Trieste, which were mapped
                           as potential gateways for the BRI, and Italy is still far behind European peers in terms
                           of Chinese FDI and trade. Yet China’s growing investments in Italy’s strategic sectors
                           and infrastructure might still become an object of economic blackmail, particularly for
                           Italian local administrations that are more likely to accommodate Chinese conditions
                           to boost the local economy while not being protected by a stable central government
                           with a consistent strategy on how to engage with China.

                           In addition to this, the global COVID-19 pandemic — which has taken a particularly
                           hard toll on Italy, with more than 30,000 deaths — risks increasing Chinese political
                           and economic influence in the country. As Beijing was more responsive than European
                           countries in providing medical supplies and assistance in the initial phases of Italy’s
                           crisis, both in the form of for-purchase goods and donations (such as the facemasks
                           provided by Huawei and Xiaomei), Di Maio openly praised China and claimed that
                           “investing in the friendship with China [through the MoU] has saved lives in Italy.”107
                           Italian officials are not naïve about Chinese aid and Prime Minister Giuseppe Conte
                           has made clear that Italy’s government is going to use the “golden power rule” to
                           protect strategic sectors.108 But in the absence of unified and decisive EU actions to
                           support economic recovery, Italy, facing grievous economic damage — with its GDP
                           expected to plummet 9.1% in 2020 according to the International Monetary Fund109 —
                           might well find itself forced to turn to China for help.

                           Longstanding economic stagnation, confrontations with the EU over austerity policies
                           and budgetary issues, trans-Atlantic trade instability, and Western tensions with Russia
                           are the factors that contributed to Italy seeking closer contact with China.

                           Consistent with its Cold War history, Italy’s political leadership has sought to balance its
                           Euro-Atlantic alignment with cooperative engagement with a variety of external players,
                           mostly for economic but also for political reasons. Italy’s engagement with China fits this
                           history, especially considering the risk averse attitude of the Italian business sector and
                           the large Chinese investments in research and development in Italy.

                           But European competition over access to the Chinese market for European products
                           undermines the possibility of a common European approach. While the EU has
                           established baselines specifically on FDI screening and in general on rules of
                           engagement with third countries, the reality is that its member states fiercely compete
                           with each other. Compared to other large European economies, Italian exports to
                           China as well as Chinese FDI in Italy are relatively limited. There are also several
                           endemic deficiencies that prevent Italy from attracting FDI in general, such as high
                           level of taxation, low productivity, and excessive bureaucracy. Therefore, the rationale
                           for Italy’s signing the MoU with China was to leverage its political weight as the first
                           and only G-7 country to endorse the BRI to potentially gain an advantage over other

                           Progress has been made regarding FDI screening and on an overall awareness of
                           security risks connected to the development of 5G networks. Yet the application of

14 | Foreign Policy at Brookings

these regulations is highly contingent on political will. Both at the EU and Italian national
levels, legislative tools for investment screening (like the “golden power rule”) have
been strengthened through extension to telecommunications, now listed as national
security assets. In several EU countries, and most recently in Italy where Huawei’s
presence has grown since 2004, potential dangers for national security connected
to the Chinese-led development of 5G technology are currently under scrutiny by
state agencies. However, the decision to apply these protective measures ultimately
depends on the political will of the parties in power.

Populist rhetoric and political quarrels between the coalition partners in Italy’s previous
government led to inconsistencies in Rome’s foreign policy choices that damaged the
country’s credibility. Aside from breaking G-7 unity on the BRI and receiving criticism
from the United States, which expressed real concern over Italy becoming an entry
point for Chinese political and economic influence, Italy also weakened the EU position
vis-à-vis China, which was already undermined by inter-state competition over access
to Chinese markets.

As the global recession due to the COVID-19 pandemic will have a particularly hard
impact on Italy because of the existing shortcomings of its economy, and in the
absence of a powerful and coordinated economic response at the European level, Italy
will increasingly risk turning to China for investment and other economic assistance.
Without substantial government oversight and a forward-looking strategy on protecting
strategic sectors — but most importantly without political stability and an approach to
China that is consistent over time — Italy risks being overwhelmed by Chinese economic
and technological power, especially after the events of early 2020.

                                                                                         Foreign Policy at Brookings | 15

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16 | Foreign Policy at Brookings

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                                                                                       Foreign Policy at Brookings | 17
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